The Global Financial Crisis: What Went Wrong? Management Accountants Are Often Asked What Caused the Crisis, but the Complexity of the Financial System Makes the Key Reasons Hard to Pinpoint. Richard Mallett, CIMA's Technical Director, and Victor Smart, Head of Corporate Communications, Offer Their Summary of the Main Factors

By Mallett, Richard; Smart, Victor | Financial Management (UK), July-August 2009 | Go to article overview

The Global Financial Crisis: What Went Wrong? Management Accountants Are Often Asked What Caused the Crisis, but the Complexity of the Financial System Makes the Key Reasons Hard to Pinpoint. Richard Mallett, CIMA's Technical Director, and Victor Smart, Head of Corporate Communications, Offer Their Summary of the Main Factors


Mallett, Richard, Smart, Victor, Financial Management (UK)


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The crisis began to surface in the spring of 2007 with rumblings about sub-prime loans, but the true starting point is seen as August 9, 2007, when investment bank BNP Paribas told investors that they would not be able to withdraw money from two of its funds. The reason: a "complete evaporation of liquidity" from the market.

The next milestone was the run on Northern Rock on September 14, 2007. Then, a year and a day later, came the spectacular collapse of Lehman Brothers after a weekend of desperate negotiations in September 2008.

This was the tipping point. The financial system went into meltdown as confidence and trust in the markets and among banks vanished. As Mervyn King, governor of the Bank of England, recently declared: "It is difficult to exaggerate the severity and importance of those events. Not since the beginning of World War I has our banking system been so close to collapse."

The real economy had already been damaged. Now, vast swathes of industry began to struggle and countries that had thought that they were immune learned that they were facing a savage downturn. The crisis had gene global. No one could accuse central banks and governments of failing to see the gravity of the situation. Their attempts to salvage the banking system and reduce the severity of the recession included measures that were unorthodox and that, only a few weeks earlier, would have been criticised as downright reckless.

Few commentators predicted the crisis or how it would unfold. It resulted from the explosive interaction of many complex factors--which are summarised on the following two pages--and was exacerbated by the length of the preceding boom. As King explained, the "failure stemmed from a chain of events, no one of which alone appeared to threaten stability, but which taken together led to the worst financial crisis that any of us can recall".

* August 9, 2007

BNP Paribas tells investors they cannot withdraw from two funds.

* September 7, 2008

The US Federal Housing Finance Agency places Fannie Mae and Freddie Mac into government conservatorship.

* September 14, 2007

Run on Northern Rock.

* September 15, 2008

The collapse of Lehman Brothers.

Bank of America agrees to buy Merrill Lynch for $50bn.

* March 17, 2008 Bear Stearns bought by JP Morgan Chase for $2 a share.

* September 17, 2008

US Federal Reserve announces $85bn rescue package for AIG. Lloyds TSB announces deal to take over HBOS. Barclays agrees to buy some of Lehman Brothers' core assets. The US Securities and Exchange Commission bans short selling.

* September 18, 2008

Central banks pump $180bn into money markets.

* September 22, 2008

Goldman Sachs and Morgan Stanley change status to bank holding companies.

* September 26, 2008

Central banks inject longer-term cash into the markets.

* September 29, 2008

UK government nationalises the Bradford & Bingley and sells its deposit book and branches to Santander. Markets plummet after US Congress rejects Wall Street bail-out.

* October 9, 2008

Iceland's prime minister warns that his country is "all but" bankrupt. Bank collapses affect investors worldwide.

* October 29, 2008

The IMF announces the creation of a short-term liquidity facility for market-access countries.

* December 19, 2008

The US Department of the Treasury authorises loans of up to $13.4bn for General Motors and $4bn for Chrysler

* January 6, 2009

UK chain Woolworths closes its doors for the last time. It is one of a string of big high-street retailers to go under.

[ILLUSTRATION OMITTED]

THE MAJOR CAUSES

A MORE COMPLEX, BUT LESS DIFFERENTIATED, CONFIGURATION OF PLAYERS

* Distinctions among different types of players were blurred and the connections between them became more opaque. …

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The Global Financial Crisis: What Went Wrong? Management Accountants Are Often Asked What Caused the Crisis, but the Complexity of the Financial System Makes the Key Reasons Hard to Pinpoint. Richard Mallett, CIMA's Technical Director, and Victor Smart, Head of Corporate Communications, Offer Their Summary of the Main Factors
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